Thursday, December 15, 2011

Future Goods and Fractional Reserve Banking

There is a crucial passage here in Mises’s The Theory of Money and Credit (2009 [1953]) used by other Austrians against fractional reserve banking (Huerta de Soto 2006: 14–15; Rothbard 2011: 733–734; Rothbard 1974: 20):

“It is usual to reckon the acceptance of a deposit which can be drawn upon at any time by means of notes or cheques as a type of credit transaction and juristically this view is, of course, justified; but economically, the case is not one of a credit transaction. If credit in the economic sense means the exchange of a present good or a present service against a future good or a future service, then it is hardly possible to include the transactions in question under the conception of credit. A depositor of a sum of money who acquires in exchange for it a claim convertible into money at any time which will perform exactly the same service for him as the sum it refers to has exchanged no present good for a future good. The claim that he has acquired by his deposit is also a present good for him. The depositing of the money in no way means that he has renounced immediate disposal over the utility it commands.” (Mises 2009: 269).

Let us review these arguments:

(1) Mises concedes that in legal terms (“juristically”) fractional reserve accounts are debt instruments. There are some anti-fractional reserve banking Austrians who do not even acknowledge that.

(2) Mises defines “credit” in the economic sense as the “exchange of a present good or a present service against a future good or a future service.” In the case of money lending, this (curiously) leads quite obviously to a monetary theory of the interest rate: interest is the return for giving up present money (conceived as a good) against future money. Yet there are few Austrians who hold a monetary theory of the interest rate. The only one I can think of is Robert P. Murphy, who concludes that interest is “quite simply the price of borrowing money or (what is the same thing) the exchange rate of present versus future money units” (Murphy 2003: 176).

(3) The assertion that a “depositor of a sum of money who acquires in exchange for it a claim convertible into money at any time which will perform exactly the same service for him as the sum it refers to has exchanged no present good for a future good” is false. Clients who open fractional reserve bank accounts lend money to a bank, and frequently leave large amounts of money of their account unused and do not call the money/debt back. Such clients do in fact regularly give up the present goods that could be purchased with money or (historically) the holding of commodity money proper that can be considered a good. Even in the case of fiat money, fractional reserve clients give up present goods that could be purchased with money.

(4) The future good that fractional reserve clients receive back when calling in their loan is money from the reserves of the bank, which represent idle money from which the fractional reserve clients are repaid their debts.

(5) Mises asserts that the “claim that he has acquired by his deposit is also a present good for him.” That is false, because the debt instrument that is the fractional reserve bank account requires the calling back of the money in order to obtain actual money proper (whether this is commodity money or, in a fiat money system, cash or the reserves of the bank). In a commodity money system, the use of fiduciary media such as a private banknote as a means of payment or medium of exchange is the use, not of money proper, but of debt instruments or IOUs as a means of payment. Whether agents wish to accept debt instruments as a means of payment for goods and services is a matter for voluntary exchange. If the use of debt as a means of payment – or the expansion of such IOUs or debt instruments acceptable as a means of payment – were invalid or immoral, vast numbers of free and voluntary transactions would be immoral. The assertion that debt or IOUs callable on demand into money proper (or whatever is used as the monetary base such as the obligations of the central bank in modern fiat systems) cannot function as money is plainly false, on both theoretical and empirical grounds. The use of IOUs or debts as money has a very long history, and this may even have been the origin of money, as many anthropologists and historians of money have concluded (Graeber 2011; Hudson 2004; Ingham 2000). Most recently, the credit origins of money have been emphasised by the anthropologist David Graeber. Let us quote from this interview with Graeber on the origin of money:

“Philip Pilkington: … Most economists claim that money was invented to replace the barter system. But you’ve found something quite different, am I correct?

David Graeber: Yes there’s a standard story we’re all taught, a ‘once upon a time’ — it’s a fairy tale.

It really deserves no other introduction: according to this theory all transactions were by barter. “Tell you what, I’ll give you twenty chickens for that cow.” Or three arrow-heads for that beaver pelt or what-have-you. This created inconveniences, because maybe your neighbor doesn’t need chickens right now, so you have to invent money.

The story goes back at least to Adam Smith and in its own way it’s the founding myth of economics. Now, I’m an anthropologist and we anthropologists have long known this is a myth simply because if there were places where everyday transactions took the form of: “I’ll give you twenty chickens for that cow,” we’d have found one or two by now. After all people have been looking since 1776, when the Wealth of Nations first came out. But if you think about it for just a second, it’s hardly surprising that we haven’t found anything.

Think about what they’re saying here – basically: that a bunch of Neolithic farmers in a village somewhere, or Native Americans or whatever, will be engaging in transactions only through the spot trade. So, if your neighbor doesn’t have what you want right now, no big deal. Obviously what would really happen, and this is what anthropologists observe when neighbors do engage in something like exchange with each other, if you want your neighbor’s cow, you’d say, “wow, nice cow” and he’d say “you like it? Take it!” – and now you owe him one. … So the real question is not how does barter generate some sort of medium of exchange, that then becomes money, but rather, how does that broad sense of ‘I owe you one’ turn into a precise system of measurement – that is: money as a unit of account?

By the time the curtain goes up on the historical record in ancient Mesopotamia, around 3200 BC, it’s already happened. There’s an elaborate system of money of account and complex credit systems. (Money as medium of exchange or as a standardized circulating units of gold, silver, bronze or whatever, only comes much later.)

So really, rather than the standard story – first there’s barter, then money, then finally credit comes out of that – if anything its precisely the other way around. Credit and debt comes first, then coinage emerges thousands of years later and then, when you do find “I’ll give you twenty chickens for that cow” type of barter systems, it’s usually when there used to be cash markets, but for some reason – as in Russia, for example, in 1998 – the currency collapses or disappears [see Humphrey 1984 – LK].” “What is Debt? – An Interview with Economic Anthropologist David Graeber,” August 26, 2011.

There is clear evidence that IOUs and debts became transferable and used widely as a medium of exchange in many ancient societies. Debt has functioned as money for thousands of years. The fractional reserve banknote or account is merely a modern form of such IOU/debt money.

(6) In a term/time deposit with a callable option, the client can also call their loan back, though usually with some penalty such as the loss of the interest or some small part of the principal. But this process of calling back a loan with a callable option is in principle no different from the fractional reserve demand deposit client calling back some or all of his loan: yet many Austrians do not deny that time deposits of this type involve an exchange of present goods for future goods. What is most interesting is that the most extreme anti-fractional reserve banking Austrians like Jesus Huerta de Soto, Walter Block and William Barnett are driven to positions that do in fact require an outright ban on all callable loans (see here and here; see also Block and Barnett 2009).

(7) Mises asserts that:

“The claim that he has acquired by his deposit is also a present good for him. The depositing of the money in no way means that he has renounced immediate disposal over the utility it commands.”

The first sentence merely begs the question. And when a fractional reserve client gives over money to his bank as a loan, he has in fact renounced “immediate disposal over the utility it commands,” because in a commodity money world he must use private bank notes that are mere debt instruments (which might in fact be refused and rejected as a means of payment), and go to the trouble of converting his debt claim into money proper by withdrawal of cash or use of checks. Even in a fiat money world, your bank cheque may be refused, you must withdraw cash or use electronic transfer to call back your debt and make payment for goods: you have certainly renounced “immediate disposal over the utility” that actual money or cash in hand commands. As Rozeff argues:

“Mises’s second incorrect claim is that ‘[t]he depositing of the money in no way means that [the depositor] has renounced immediate disposal over the utility that it commands.’ Because the depositor cannot be sure of getting his money back and because he is exchanging it for a different good with different utility, which is why he makes the deposit in the first place, he obviously has renounced any utility that arises from immediately spending the deposit. He has exchanged it for utility arising from a deferred claim to funds plus whatever else in the rearrangement provides him with utility, such as checking services, storage, and interest.” (Rozeff 2010: 509).

99 comments:

Speaking of banking, Lord Keynes, have you ever reached the parts of The Wealth of Nations where Dr. Smith comments on banking? Michael Emmett Brady has a couple of reviews on Adam Smith's magnum opus that briefly comment on the subject.

“(1) Mises concedes that in legal terms (“juristically”) fractional reserve accounts are debt instruments. There are some anti-fractional reserve banking Austrians who do not even acknowledge that.”

Rothbard does as well. He understands that modern courts have viewed them as debt instruments. He just doesn’t agree with them because economically/socially people treat them as bailments.

“(2) Mises defines “credit” in the economic sense as the “exchange of a present good or a present service against a future good or a future service.” In the case of money lending, this (curiously) leads quite obviously to a monetary theory of the interest rate: interest is the return for giving up present money (conceived as a good) against future money. Yet there are few Austrians who hold a monetary theory of the interest rate. The only one I can think of is Robert P. Murphy, who concludes that interest is “quite simply the price of borrowing money or (what is the same thing) the exchange rate of present versus future money units” (Murphy 2003: 176).”

Or with slight elaboration, we get “Interest is the return for giving up present money (that can be spent on present consumption) against future money (that is earned from investment and can be spent on future consumption). “ Which leads us right back to a time preference theory of the interest rate.

“(3) The assertion that a “depositor of a sum of money who...[deleted due to space constraints]”

Regardless of their legality, actors always treat the money they have in a checking account as funds that they always have access to. I’m not saying that this economic consequence means bank deposits should now be bailments, btw, even though Rothbard clearly did. Simply because they do not use it does not mean that they do not believe it is theres. People keep hundreds/thousands of dollars of cash in their house in case there is a a problem, or for those rainy days. They could not touch the money for years as it sits in a vault along with all of their other valuables. Does this mean that they have renounced their claim over it? Absolutely not.

“(5) Mises asserts that the “claim that he has acquired by his deposit is also a present good for him.” .......[deleted due to space constraints]”

All that matters is that people PERCEIVE them to be money substitutes. In order for something to be money it has to be part of money proper. For a bill of exchange to be a general medium of exchange and entertain widespread use, people PERCEIVE that it is equivalent to money proper. Something is money when the public perceives it as always redeemable for a fixed sum (the par value of money). As I said in the earlier thread, everyone treats the money in their bank account as funds that are theirs, and that they have access to, whether or not it is that legally.

“Even in a fiat money world, your bank cheque may be refused, you must withdraw cash or use electronic transfer to call back your debt and make payment for goods: you have certainly renounced “immediate disposal over the utility” that actual money or cash in hand commands.”

Besides the point. Someone could have left $20 bucks at their house and they are at the mall. Does this mean its no longer money for them? And switching funds from a debit to cash is the exact same thing people have to do for savings to checkings. But people still perceive the money in their savings accounts as their own income.

Rothbard provides an excellent analogy:

“Another example will serve to answer the common objection that a savings bank deposit is not money because it cannot be used directly as a medium of exchange but must be redeemed in that medium..Suppose that, through some cultural quirk, everyone in the country decided not to use five-dollar bills in actual exchange. They would only use ten-dollar and one-dollar bills, and keep their longer-term cash balances in five-dollar bills. As a result, five-dollar bills would tend to circulate far more slowly than the other bills. If a man wanted to spend some of his cash balance, he could not spend a five-dollar bill directly; instead, he would got to a bank and exchange it for five one-dollar bills for use in trade. In this hypothetical situation, the status of the five-dollar bill would be the same as that of the savings deposit today. But while he holder of the five-dollar bill would have go to a bank and exchange it for dollar bills before spending it, surely no one would say that his five-dollar bills were not part of his cash balance or of the money supply.” (Rothbard, Economic Controversies, p.707).

“Interest is the return for giving up present money (that can be spent on present consumption) against future money (that is earned from investment and can be spent on future consumption). “ Which leads us right back to a time preference theory of the interest rate. "

There flaw here is when you say it "can be spent on present consumption". Yes, it might or might not.

(1) the money can be held by itself as a hedge against future uncertainty owing to the utility that provides, or

(2) it can be used to buy financial assets on secondary markets.

There is no necessary reason why it will be spent on consumption goods/capital goods at all, and your argument falls flat on its face.

"People keep hundreds/thousands of dollars of cash in their house in case there is a a problem, or for those rainy days. They could not touch the money for years as it sits in a vault along with all of their other valuables. Does this mean that they have renounced their claim over it? Absolutely not. "

Red herring. Of course, you have a claim to repayment of your money in a FR account.

Mises's argument is that:

“A depositor of a sum of money who acquires in exchange for it a claim convertible into money at any time which will perform exactly the same service for him as the sum it refers to has exchanged no present good for a future good”

"There flaw here is when you say it "can be spent on present consumption". Yes, it might or might not.

(1) the money can be held by itself as a hedge against future uncertainty owing to the utility that provides, or

(2) it can be used to buy financial assets on secondary markets.

There is no necessary reason why it will be spent on consumption goods/capital goods at all, and your argument falls flat on its face. "

Sorry, but your missing the point. All money that an individual holds he plans to eventually use it for consumption, whether it is future or present.

For Rothbard's interest rate, all that it means is that it CAN be spent on present consumption. Money provides the relief that it is a general medium of exchange, and if someone has enough of it, they can spend it on consumer goods.

For interest to occur the availability of money must be restricted. Holding money (keeping a cash balance), is a different beast.

"But here we may state that the desire to keep a cash balance stems from fundamental uncertainty as to the right time for making purchases, whether of capital or of consumers' goods. Also important are a basic uncertainty about the individual's own future value scale and the desire to keep cash on hand to satisfy any changes that might occur." (Rothbard, MES, p.265)

“Red herring. Of course, you have a claim to repayment of your money in a FR account.

Mises's argument is that:”

Yes, which people perceive will generally ("always") work, a 'general' medium of exchange. The argument still applies even though “sometimes” places don’t accept checks or debit cards or in order to use them they have to be over $20, etc. Any normal person will say that those cases doesn't mean an individual doesn’t have access to those funds.

"LOL... This is irrelevant. I don't deny that debt instruments (FR accounts, FR private bank notes, bills of exchange, etc.) can be said to increase the money supply."

No, it applies. I was drawing an analogy to this:

“That is false, because the debt instrument that is the fractional reserve bank account requires the calling back of the money in order to obtain actual money proper (whether this is commodity money or, in a fiat money system, cash or the reserves of the bank).”

Just because there is a two step process doesn’t mean an individual doesn’t consider it part of his income. And things like this are different than other “liquid” assets, because they are redeemable at a fixed value.

"But here we may state that the desire to keep a cash balance stems from fundamental uncertainty as to the right time for making purchases, whether of capital or of consumers' goods. Also important are a basic uncertainty about the individual's own future value scale and the desire to keep cash on hand to satisfy any changes that might occur." (Rothbard, MES, p.265)

This is little more than Keynes's precautionary motive for holding money.

(1) it's enough to note that even some Austrians do not think that houses are capital goods. Most other economists don't either.

(2) readers who wish to read a debate about it can read the thread above, and make up their own minds. "

Just so you know, I consider this a "tap out" just like in boxing. Mainly because my reply had other things than whether "houses are consumer goods". At least post my response and then post a reply with your decision not to continue the thread, or post my recent post saying I replied but you decided not to acknowledge it. Its misleading because it gives the impression that I could not respond to your arguments.

1) Is an appeal to authority. Clearly all Austrians do not agree on everything. Neither do all Keynesians, especially Neo-Keynesians and Post-Keynesians. Does this mean one's argument is wrong? Nope.

"That assertion is plainly false: many people - especially the wealthy - hold vast amounts of money and die without spending it.

(1) money can provide utility in and of itself because of uncertainty and the precautionary demand for money in an uncertain world.

(2) there are real people who hold large amounts of money just for the sake of holding it and never spend it. "

1)Yes, because they planned on living and doing something with it, ie donating it or bequeathing it to their heirs. That counts as consumption.

2)People hold money because they can use it to buy other goods. Money is only valuable because of this, and people only demand it because of this. People hold cash balances due to the uncertainty of when/what goods to buy. If people hold "money" for pleasure itself (gold for jewelry or it looks nice, or paper money/coins for collecting/magic tricks etc), then that acts as consumption and does not function as money to them.

"This is little more than Keynes's precautionary motive for holding money. "

Okay? Clearly there are differences between Rothbard and Keynes approach, especially with the idea of "compartmentalizing" different demands (For Keynes-speculative, transaction, and precautionary).

Rothbard:

"The first error in this concept is the arbitrary separation of the demand for money into two separate parts: a "transactions demand," supposedly determined by the size of social income, and a "speculative demand," determined by the rate of interest. We have seen that all sorts of influences impinge themselves on the demand for money. But they are only influences working through the value scales of individuals. And there is only one final demand for money, because each individual has only one value scale. There is no way by which we can split the demand up into two parts and speak of them as independent entities. Furthermore, there are far more than two influences on demand. In the final analysis, the demand for money, like all utilities, cannot be reduced to simple determinants; it is the outcome of free, independent decisions on individual value scales. There is, therefore, no "transaction demand" uniquely determined by the size of income." (Rothbard, MES, p.787).

(1) False. No Austrian denies that the GOVERNMENT, for legal purposes, defines demand deposits as debt. Austrians are talking economically, not definitionally or legally.

(2) False. It applies to both barter and monetary economies. In barter economies, time preference would be manifested as 2 future loaves of bread being exchanged against 1 current loaf of bread. In a monetary economy, the time preference would be manifested as 2 future dollars being exchanged against 1 current dollar, given the price of a loaf is $1.00 now and is expected to be $1.00 in the future. If there is inflation expectation of 10%, then that would tend to add an inflationary component to the monetary return, so that 2.10 future dollars would be exchanged against 1 current dollar.

(3) False. You're just redefining demand accounts into debt accounts to fit your worldview. Mises was speaking economically. Economically, when someone deposits money into a bank in exchange for a claim convertible to money, instantly, at any time, the depositer has not exchanged a present good for a future good, so economically, it cannot be considered a debt contract. Yes, the government defines it as such, yes, you define it as such, yes, even the depositer could define it as such, but economically, there is no exchange of future goods for present goods. It remains a present good.

(4) False. You are presupposing that present claims to money, convertible in the present, are somehow finalizing a future oriented claim. That's not what is taking place. A transferable claim to money, immediately if the depositer wants, is not a future good in the economic sense. It is a present good in the economic sense. Laws and your opinion notwithstanding.

(5) False. The claim is a claim to a present good, not a future good. The transferable claim is to the depositer a present good, because it is immediately transferable. There is no lending time period inherent in the claim such that he has to abstain from his consumption in the present in order to get the claim. In addition, he can exchange the claim itself to finalize his consumption exchanges with others. Economically, the claim is a present good because he can immediately either use the claim, or immediately exchange the claim into dollars. If you are going to say that such claims are not present goods because a certain amount of time elapses from the time he decides to buy something, to the time the merchant takes physical possession of the money, then by that logic, present goods would be impossible, because even in cash transactions, a positive period of time elapses from going into one's wallet, and then moving one's hands, to picking out the bills, to then giving them to the merchant, who then puts it in the register. Just like this cash transaction is in the economic sense a present good transaction, so too is holding an immediate transferable claim to money, a present good. Just because time elapses, it doesn't make it a future good.

(6) A debt contract with a perpetual call option is economically similar to a transferable claim to demand deposit money, but it's not equivalent. In the former case, the ownership rights of the MONEY are transferred from client to bank. In the latter case, the ownership rights of the MONEY are retained by the client. For contracts that have ownership rights of the money transferred from client to bank, such that it is a loan, but the loan contains a perpetual call option, such that the client can withdraw an equal sum of money at any time they want, then regardless of the intentions of client or banker, economically it is the case that there will exist more immediately transferable claims to money, more immediately callable options to money, than there exists money. A bank that signs $100 worth of immediately transferable claims to money and immediately callable loans, but has only $10 on hand, is economically insolvent. If this is what the bank and their clients are willing to do, then they should incur the full costs of this behavior, and not advocate that myself and others who are not clients of that bank, pay the depositers and the bankers when they lose all their money in the case of banktruptcies and bank runs. But because you want to steal innocent people's money to bail such people out, then either you must stop the practise of FR, or stop the stealing of innocent people's money to pay for the losses you incur. You can't have both.

(7) False. Transferable claims to be money are also used as medium of exchange in our economy, and are hence economically equivalent to present goods. Actual cash money is used in only a minority of total exchanges. The demand depositer has NOT in fact given up immediate command over the money. He has a claim that allows him immediate control over the deposited money. That makes the claim a present good, economically speaking, and not a future good. There is no contractually signed minimum time period that the depositer must wait before he can withdraw money. It is NOT a future good!

"Yes, because they planned on living and doing something with it, ie donating it or bequeathing it to their heirs. That counts as consumption. "

Passing on money in a will counts as "consumption"?? No, it doesn't. That is plainly false. Consumption = purchasing of producible goods and services.

"People hold cash balances due to the uncertainty of when/what goods to buy."

"If people hold "money" for pleasure itself (gold for jewelry or it looks nice, or paper money/coins for collecting/magic tricks etc), then that acts as consumption and does not function as money to them. "

"Economically, when someone deposits money into a bank in exchange for a claim convertible to money, instantly, at any time, the depositer has not exchanged a present good for a future good, so economically, it cannot be considered a debt contract. "

(1) Rubbish. By having a substantial amount of money in your demand deposit account, you have given up the use of that money, and without any question have given up present goods for future goods.

(2) Secondly, it isn't instantly, at any time, a claim convertible to money:

(a) cheques take time to clear, and they might be refused;(b) cash withdrawal at the bank must be within business hours and you frequently have to wait in lines;(b) even electronic withdrawal/payment requires validation and may not be available(c) even ATMs require validation and there are cases where they might not be working properly owing to faults etc.

That fact that you can recall your debt in part or whole does not change the fact that until you get repayment you have given up present goods.

"Passing on money in a will counts as "consumption"?? No, it doesn't. That is plainly false. Consumption = purchasing of producible goods and services."

No, people get satisfaction from the knowledge that their children will have a better future. People hold money for present and/or future consumption. And knowing that their children/poor people will be better off counts as future consumption. Are you saying that when I donate money to the GoodWill Foundation and earn satisfaction, this doesn't count as consumption for me?

Wait, isn't this like saying "just because you are an unmarried man doesn't make you a bachelor"?

How are we defining "future" now? Is it some kind of fixedly subjunctive, permanently unreal suppositional state? If I say "I will buy a boat in the future" and then ten years later I buy one, have I proven myself a liar, since I technically still bought the boat in my own (later) present?

"Financial assets are not consumption goods or services. The creation of financial assets/liabilities, or their extinction, e.g., by lending, borrowing and repayments, are financial transactions that are quite different from expenditures on goods and services and take place indepedently of them. The purchase of a financial asset is obviously not expenditure on consumption, being a form of financial investment. "

For contracts that have ownership rights of the money transferred from client to bank, such that it is a loan, but the loan contains a perpetual call option, such that the client can withdraw an equal sum of money at any time they want, then regardless of the intentions of client or banker, economically it is the case that there will exist more immediately transferable claims to money, more immediately callable options to money, than there exists money.

(1) So in other words, you are telling us here that you think loans with a callable option are illegitimate and fraudulent? So now your position requires an outright ban on all freely negotiated exchanges involving callable loans, even though you admit that ownership of the money has passed to the bank in types of callable loans. Nothing but a vicious, violent attack on private freedom. You clearly hate liberty and yearn to destroy free contract.

(2) You say:

"A bank that signs $100 worth of immediately transferable claims to money and immediately callable loans, but has only $10 on hand, is economically insolvent."

Your claim that the bank issuing $100 in loans with $10 reserves has already been debunked above as nonsense - ignorant of basic double-entry bookkeeping.

(3) You say:

"If this is what the bank and their clients are willing to do, then they should incur the full costs of this behavior,"

So what is this now? An admission that such loans with a callable option are NOT illegitimate and fraudulent? That they would be acceptable in the anarcho-capitalist fantasy world? Despite all your rubbish above labouring to prove they are illegitimate.

"By having a substantial amount of money in your demand deposit account, you have given up the use of that money, and without any question have given up present goods for future goods."

False. You have not given up use of that money. There is no difference in principle here between giving your money to a banker for a demand deposit, and stuffing money into a box and burying it in your backyard. In both cases, yes, you don't have INSTANT access to your money, because on both cases, you have to move your body, go to where the money is, take physical possession of your money, then move your body again. In both cases, it takes time. In both cases, you don't have physical possession of your money. But in both cases, you have NOT given up the ability to buy present goods in exchange for future goods.

In your crap worldview, there cannot even be such thing as NOT giving up use of one's money. Even if one's money is in one's wallet in one's back pocket, it STILL would take time to go into one's pocket, take it out, then open the wallet up, then take the bills out.

Your reasoning leads to utter absurdity. You are making the fallacious claim that just because you aren't physically holding your money in your hand, that you somehow don't have present control over your money. But then by that logic, money in wallets, or underneath mattresses, or buried in one's backyard, all these actions must be considered a loan, because according to you, the person is giving up INSTANT control over the money. In all cases, the person must take time to physically move their bodies, physically take possession of their money, before you will say that the person has present control over their money. But who in their right mind would call these actions a creation of debt or a loan?

Just like I don't have physical possession of my money if it's at home in my house, while I am at work, even though that money is my property and not a loan despite my having to take time to touch it, so too is money kept at a bank not necessarily a loan, solely because I am not physically touching it and that it would take time for me to actually take physical possession of it.

Economically, the difference between present goods and future goods is determined in a context of exchanges with minimum time periods associated with those exchanges.

If there is no minimum time period contracted for, and the only time that does pass is the required time that is metaphysically necessary for someone to go through physical motions of practising one's exercise of ownership of one's property, like going into one's backyard, or backpocket, or going to one's bank, then that is still a present good.

The concepts of "present" and "future" in economics are praxeologically grounded, they have to do with intentions, not merely the fact that humans are temporal and that everything takes time. Your worldview would deny the entire existence of present goods, for according to your logic with money in banks, it would also take time for someone to go through the motions over time, to get one's money out of one's pocket. There is probably one foot or so between one's money and one's hands in that case, and one mile or so between one's money and one's bank. Why should we say that one foot makes one an owner of a present good, but one mile doesn't? It's arbitrary.

If on the other hand there is a time period contracted for, such that in addition to the metaphysically required time needed to engage in ANY action, there is also a minimum stipulated time such that although the person is physically capable of taking possession and exercising ownership of one's money, which of course takes time, there is a mandatory "waiting time" as well. That is when present goods turn into future goods.

Now, a contract that is called a loan with perpetual call option, is, economically, a present good, because it is no different, economically, from holding one's money buried in a box in one's backyard. Yes, it takes time to take possession of one's money, but there is no contracted for minimum time period that constrains the person from being able to take physical possession IF THEY OTHERWISE COULD.

"(2) Secondly, it isn't instantly, at any time, a claim convertible to money:"

"(a) cheques take time to clear, and they might be refused;(b) cash withdrawal at the bank must be within business hours and you frequently have to wait in lines;(b) even electronic withdrawal/payment requires validation and may not be available(c) even ATMs require validation and there are cases where they might not be working properly owing to faults etc."

According to this uninformed reasoning, brought about by an inability to properly integrate TIME into one's economic arguments, NOTHING to you can EVER be a "present good", because in every human action, time passes. That means it takes time to go into one's back pocket. It takes time to go into one's backyard. It takes time to even take your hand that is full of money, to move it towards the counterparty and transfer the money from your hand to their hand.

You are not having problems with economics directly. That is just an indirect consequence of you having problems with dealing with the fact that you are a temporal entity, that EVERYTHING you do takes time, that in your world, the only way that anyone could have control over a present good would be if humans were beyond the limits imposed by time, which of course means to you there can never be a present good. Every good is to you a future good, for in every case, it takes time to think of exercising control over one's property, to actually exercising control over a good, to accomplishing the task of exercising control over a good.

How in your worldview can ANYTHING be considered a present good, if EVERY HUMAN ACTION conceivable takes time?

You see, this is the problem with the Keynesian school. It is unable to integrate the concept of time. The Keynesian school is about static aggregate, and cannot accommodate market PROCESSES that TAKE TIME.

So you become utterly confused on how to understand the difference between present goods and future goods. Your confusion runs so deep that you cannot even explain present goods at all while remaining consistent with what you have said defines future goods.

"If on the other hand there is a time period contracted for, such that in addition to the metaphysically required time needed to engage in ANY action, there is also a minimum stipulated time such that although the person is physically capable of taking possession and exercising ownership of one's money, which of course takes time, there is a mandatory "waiting time" as well. That is when present goods turn into future goods."

That is total rubbish: if this were true, then a ticket for parking lot, where you can come to the private carpark and look for a parking place any time you (within opening hours), would not be a future good either, and would be invalid or illegitimate or fraudulent.

"Now, a contract that is called a loan with perpetual call option, is, economically, a present good, because it is no different, economically, from holding one's money buried in a box in one's backyard."

That is false: you have

(1) lent the money out and transferred ownership;(2) now faced the risk of default, and(3) the act of calling it back is different from merely digging up something

"That fact that you can recall your debt in part or whole does not change the fact that until you get repayment you have given up present goods.

By that crap logic, we should call holding one's money in one's backyard, or backpocket, to be a future good, because we cannot "change the fact that until I have physical possession of the money, I have given up present goods."

In other words, THERE CANNOT BE PRESENT GOODS in your worldview. Since in all cases, ideas precede actions, and there will always be a positive time period that passes before one can perform the action of exercising control over a good.

Since present goods are, using your muddleheaded integration of time in your claims, impossible, it means that the whole distinction between present versus future goods loses all meaning. In your worldview, there can ONLY be future goods, since time never stops, and every action takes time.

Economic goods are objects of economic ACTION. That means time passes for BOTH types of actions over economic goods, present and future. Your confusion is that you are taking the concept of "present" and "future" and using the non-economic, mathematical definitions, instead of the economic definitions, which are praxeologically based.

Both present and future goods will be in the "future" if you define these terms mathematically, so you even treat exercising of ownership over a present good (one's money) as a future good.

You're not using the economic conceptions of "present" and "future" goods. This is because you are not an economist, or you consider yourself one but you don't know how to think like one.

"You have not given up use of that money. There is no difference in principle here between giving your money to a banker for a demand deposit, and stuffing money into a box and burying it in your backyard. "

I said: "The demand depositer has NOT in fact given up immediate command over the money. He has a claim that allows him immediate control over the deposited money."

You responded: "False. He has given up use of the money and purchasing of goods for money he never calls back. His account is merely a debt he can call back."

That's false. He hasn't given up the present use of his money just because he put his money in a bank, exactly like he hasn't given up the present use of his money just because he put his money in his backyard, or in his pocket, or under his pillow. In all cases, yes, it takes time for him to get his money and put it in his hand, but that doesn't mean that these are future goods! They are all present goods, because he did not act to forsake present control over his money. Your conception of the time of forsaking control over one's money is caused by the fact that humans are metaphysically temporal and that everything we do takes time. That is not what makes a good a future good. What makes a good a future good has to do with exchanges of ownership titles for a minimum agreed time period. Mother nature doesn't turn a good from present into future, it's human action that does it.

I said: "That makes the claim a present good, economically speaking, and not a future good. There is no contractually signed minimum time period that the depositer must wait before he can withdraw money."

You said: "Irrelevant."

False. It is relevant. The whole concepts of present versus future goods has to do with purposeful human action, and not the fact that time passes no matter what we do. If you based the meaning of future good on the mere fact that time passes during the whole action from idea to achieving one's goal, then EVERY GOOD would have to be considered a future good, since even if one had money in one's backyard, or backpocket, or under one's pillow, it will take time for the person to take physical control of his money.

Your worldview has a catastrophic reductio ad absurdum flaw that makes it fall like a house of cards. The flaw is your inability to properly integrate TIME as it pertains to human action, which is brought about by your lack of education in economics. If your worldview is Keynesian, and ONLY Keynesian, then you will NEVER be able to understand economics, because the Keynesian school is woefully incomplete, and yet you are using it as if it is complete. This is why you inject mathematical abstractions of "present" and "future". It's because you lack an economic understanding of time.

I said: "Just because time elapses, it doesn't make it a future good."

You said: "Wait, isn't this like saying "just because you are an unmarried man doesn't make you a bachelor"?

No. It is not like saying that at all.

"How are we defining "future" now? Is it some kind of fixedly subjunctive, permanently unreal suppositional state? If I say "I will buy a boat in the future" and then ten years later I buy one, have I proven myself a liar, since I technically still bought the boat in my own (later) present?"

No. You did not lie if you did that.

Let me ask you this:

Suppose I told you that I am going to consume a good in the present, that is, I am going to engage in an action concerning a present good. According to LK's worldview, I WOULD be lying, because there has to be some positive time that elapses before I can actually accomplish that goal. First, I come up with the idea to engage in an action concerning a present good. Then I have to ACT, which takes time. I would have to walk to the company refrigerator, or cafeteria, which will take time, I would have to reach into the refrigerator, or my wallet, which will take time, then I will have to walk to the table, which will take time, and then I will have to raise the food to my mouth, which will take time, then I will eat it, which also takes time.

If all you do is focus on the physical aspects, and ignore the teleological aspects, then you will be forced to label my action as concerning only future goods, and not present goods.

Tell me, if you agree that time MUST pass for ANY action to take place, then how in the heck could ANYONE, who necessarily exists through time, always, EVER engage in an action concerning a present good, if the only requirement for something to be a future good, is for time to pass?

"What makes a good a future good has to do with exchanges of ownership titles for a minimum agreed time period. "

Again: if this were true, then a ticket for a parking lot, where you can come to the private carpark and look for a parking place any time you want (within opening hours), would not be a future good either, and would be invalid or illegitimate or fraudulent.

"we should call holding one's money in one's backyard, or backpocket, to be a future good, because we cannot "change the fact that until I have physical possession of the money, I have given up present goods."

(1) keeping your money in a chest or buried in the ground on your property is merely holding of an asset. You still own the asset. You get nothing in return, and there is no exchange involved. It's the same money you dig up.

(2) A mutuum loan to the bank IS an exchange of present for future goods, in which you give up the present good - the money - and the ownership of the money, hand the money over, in exchange for the future goods that are interest and/or banking services (e.g., use of cheques, a debit card, electronic funds transfer overseas etc), and the future good that is the tantundem (different money of the same quantity), the calling of your loan money back in whole or part if you wish too.

I said: "in the former case, the ownership rights of the MONEY are transferred from client to bank. In the latter case, the ownership rights of the MONEY are retained by the client."

You said: "The ownership rights to the money given over as a mutuum loan for a FR account ARE transferred to the bank."

Economically speaking, that's nonsense. If you retain perpetual control over the money, if "lend" money to a back that has a perpetual call option attached, where the bank is obligated to give you the money at any time you wished, then there is no difference, economically speaking, between that and what you would call a bailment deposit.

No, the ownership isn't transferred just because the client and banker change the location of the money from a wallet to a safe.

No, the ownership isn't transferred just because time must pass before client can again take physical possession of the money, say in his hand.

I said: "A bank that signs $100 worth of immediately transferable claims to money and immediately callable loans, but has only $10 on hand, is economically insolvent."

Just because the banks are allowed to create new assets out of thin air on their accounting statements, such that for every liability increase due to FR loans, there is an equivalent asset that is generated, such that liabilities equals assets with then allegedly turns the bank from insolvent to solvent.

For the bank is immediately exposed as insolvent as soon as it has to satisfy all of its demand deposits relatively close together. Bank runs exposes a bank's lack of assets, and the fact that the bank's assets are less than their liabilities.

BOTH definitions of insolvency are present for banks. Their liabilities of cash demand deposits are not just liabilities when people withdraw cash. They are liabilities because of their nature.

If you were right, then bank runs could not result in a bank's bankruptcy. They would have enough assets to satisfy all their liabilities. But FR banks DON'T have such adequate assets to satisfy their liabilities, so technically, all FR banks are insolvent. Just because insolvent banks can continue to stay in operation as long as all their liabilities are not called upon, it doesn't mean that they are not insolvent. The fact that Bernie Madoff's scheme lasted for 10 years doesn't mean that it should be considered a Ponzi scheme only after more people withdrew money than paid in.

"It is not insolvent in sense (2). It would be insolvent in sense (1) ONLY if could not meet its debts (i.e, payments to FR clients as they demand repayment)."

False. It would be insolvent in both senses. You are fallaciously labelling a liability created out of thin air as an asset, and you are ignoring the fact that ALL of the demand deposits are liabilities, not just those it satisfies withdrawals for.

Economically speaking, that's nonsense. If you retain perpetual control over the money, if "lend" money to a back that has a perpetual call option attached, where the bank is obligated to give you the money at any time you wished, then there is no difference, economically speaking, between that and what you would call a bailment deposit.

(1) It not a bailment at all: it is mutuum with the option of calling back some of your loan money.

(2) You sneak in the words "perpetual control over the money" - which can only mean in this context "ownership of the money," a total lie and misundertanding again of the FR account.

(3) "bank is obligated to give you the money at any time you wished"

Again the dishonest words: "give you the money at any time you wished" - no, it doesn't: it has entered a contract TO REPAY its loan to you on demand.

For the bank is immediately exposed as insolvent as soon as it has to satisfy all of its demand deposits relatively close together.

Whether it is insolvent in the sense of being unable to meet its FR account repayments or callable loan repayments depends entirely on whether it does in fact meet those payments.

By the same flawed logic you use, almost ALL insurance companies are fraudulent because they might be "immediately exposed as 'insolvent' as soon as they have to satisfy all of their insurance claims relatively close together."

Bank runs expose a bank's lack of assets, and the fact that the bank's assets are less than their liabilities.

It exposes only the degree of liquidity of the bank's assets. Many FR banks have been perfectly capable of meeting their obligations, even in a crisis, because they have asset holdings that include liquid assets that allow them to get money quickly. Or they can borrow against some of their assets.

"If you were right, then bank runs could not result in a bank's bankruptcy. They would have enough assets to satisfy all their liabilities. "

I've already dealt with your laughbale, idiotic ignorance here: a surge in FR account clients deamnd for repayment demonstrates the degree of liquidity of the bank's assets and whether it jusged worthy by other bank/lenders to borrow agianst its assets.

Many FR banks have been perfectly capable of meeting their obligations, even in a crisis, because they have asset holdings that include highly liquid assets that allow them to get money quickly. Or they can borrow against some of their assets.

Actually insurance, by your flawed logic, would be far more fraudulent, because the aggregate value of all its potential policies would FAR in excess of its assets in any one year and its cash flow earnings from premiums/insurance payments.

"For contracts that have ownership rights of the money transferred from client to bank, such that it is a loan, but the loan contains a perpetual call option, such that the client can withdraw an equal sum of money at any time they want, then regardless of the intentions of client or banker, economically it is the case that there will exist more immediately transferable claims to money, more immediately callable options to money, than there exists money."

"(1) So in other words, you are telling us here that you think loans with a callable option are illegitimate and fraudulent?"

I am saying that economically, they are no different from demand deposits, or putting one's money underneath one's pillow, or one's wallet, or one's backyard.

Economically equivalent concepts cannot be altered just because they are named differently.

Contracts that are "loans with a perpetual call option", with no minimum time period, with no exchanging of control for a minimum time period, are, economically speaking, not loans, because at no time does the depositer forsake control or exchange control over the money. If you say yes he does forsake present control, on the basis that he now has to take time to get his money in his hands, then by that crap logic, you must also believe that putting one's money in one's box buried in one's backyward, or placed underneath one's pillow, or even in one's wallet, must also be defined and legally recognized as loans, since there too, TIME must pass before the subject can take physical possession of his money in his hands.

You are getting confused because you think that just because time and space separates a subject from a sum of money, that the subject forsakes present control and ownership of the money. That is silly. Even the banker could not be considered the present owner of the money, because he too would be separated from the money by time and space. For if the banker wanted to take control over the money, he would have to walk to his computer terminal, sit down, type on the keyboard, and then electronically transfer the money. In that case, because time passed, then according to you even the banker could not be considered having control over a present good. He too would have to be considered a claimer over a future good.

If, then, everyone can only have control over future goods, then there would be no owners over present goods, which means the entire meaning of "future" goods would lose all meaning, because the validity of the concept "future good" REQUIRES "present good" to have meaning. So if "present good" does not exist, then neither can "future good."

Your whole worldview collapses like a house of cards.

So if you ask me if a loan with a perpetual call option is fraud? I would say yes, De Soto is right, it is ECONOMIC "fraud", because it is a representation of something that cannot be economically distinguished from a demand deposit whose ownership is retained by the depositer, but is claimed to be different from it.

It would be like two people contracting to label their unwelcomed appropriation of someone else's money as different from theft, because they define theft only to take place when the aggressor uses violent threats. Yes, they "agreed" to it, yes they "contracted" for it, yes there is no violence, but that still doesn't make the action something other than theft.

"So now your position requires an outright ban on all freely negotiated exchanges involving callable loans, even though you admit that ownership of the money has passed to the bank in types of callable loans. Nothing but a vicious, violent attack on private freedom."

False.

First, a loan that has a callable option is a loan, if the lender and borrower don't both retain present control over the money. As we have seen, using your crap logic, not even the banker could be considered controller over a present good, because just like the depositer has to take time to take physical possession of the money, so too does the banker have to take time to take physical possession of the money, which means if the client cannot be considered the present owner, then neither can the banker, which means neither could defend themselves as legitimately authorized to transfer ownership rights (which is a "present" concept).

You are hilariously just parroting Selgin and White, who are so utterly confused as to the nature of property rights as it pertains to future versus present goods, and hilariously actually believing that you can pretend to be a defender of individual property rights by saying those who are against FR are somehow aggressors against property rights.

You cannot defend FR against defenders of property rights by misunderstanding and misrepresenting property rights, before you turn things around and claim that those against FR are against property rights.

Preventing fraud is not a violation of personal freedom. If someone comes to the conclusion that FR is fraud, and their justification is superior to yours, then you are in no position to say they are against individual property rights. You would be against them because you do not understand them.

Property rights is having an unconditional and absolute control over an object. Anti-FR advocates argue that a person keeping their money underneath their mattress where they retain unconditional and absolute control over the money, or in a bank where they retain unconditional and absolute control over the money, they are two examples of the same fundamental economic phenomena, despite the fact that in both cases time and space separates the unconditional and absolute controller from the money, but one just has MORE time and/or MORE space separating the subject from the money.

Just because the time and space separating the banker from the money is smaller than the time and space separating the client from the money, it doesn't mean that the banker has present control whereas the client has future control. Ownership is a praxeologically founded concept, not an empirical, physical time and space kind of a concept.

Why do I retain present control over money held underneath my mattress, but not money held in a brick building with security guards?

"Anti-FR advocates argue that a person keeping their money underneath their mattress where they retain unconditional and absolute control over the money, or in a bank where they retain unconditional and absolute control over the money,"

The FR client does not "retain unconditional and absolute control over the money" - he has given up ownership and control and the bank now owns the money and lends most of it out. The fractional reserve account is a mere debt, a debt instrument. The FR client receives back, not the same money, but DIFFERENT money, a tantundem, from the bank's reserves, sale of financial assets or borrowing against assets.

"Why do I retain present control over money held underneath my mattress, but not money held in a brick building with security guards?"

LOL, that is because your original money is NOT "money held in a brick building with security guards". The original money was a mutuum (a loan): the bank became the owner, and lent most of it out.

The money "held in a brick building with security guards" would be part of the bank's reserves called vault cash, from which it draws tantundem payments to repay loans to FR clients. The reserves ARE NOT YOUR MONEY. Your FR account is just the record of a debt on the bank's balance sheet, and you can call back the debt and get repayment from reserves, should you wish.

I thought you liked doing that. You yearn to destroy free contract by advocating that the government use force to curtail credit expansion. You want credit expansion, but not credit expansion determined by free contract. How can you pretend to be all offended at the mere thought that someone else is against it like you (not saying I am, just that you BELIEVE I am, and you sound all righteous in calling that out)? Are you a self-hater?

"(2) You say:"

"A bank that signs $100 worth of immediately transferable claims to money and immediately callable loans, but has only $10 on hand, is economically insolvent."

"Your claim that the bank issuing $100 in loans with $10 reserves has already been debunked above as nonsense - ignorant of basic double-entry bookkeeping."

False. You did not "debunk" anything. All you did was fallaciously claim that a liability is also an asset just because the government allows banks to account for such liabilities as assets. But the government cannot abolish economic laws, and that is why when clients do nothing but exercise their instantaneous control of the money held at the bank, it can result in the bank's bankruptcy.

And no, before you herp derp over private insurance companies which can go bankrupt if every client puts in a claim at the same time, these bankrtupcies are not due to the insurance companies claiming an a liability to be an asset. They are due to non-intention, non-purposeful events such as natural disasters. They are based on events that must occur before the clients can choose to exercise their contractual rights to submit a claim.

With banks on the other hand, the contractual rights from the clients are CHOSEN to be exercised. The right to withdrawal is not contingent upon certain events from taking place first. The client can ALWAYS withdraw money. Because of that, the bank's fiduciary duties are far different from an insurance company's. So you cannot compare them and say that if one supports an insurance company doing what it does despite the possibility of bankruptcy, that one is obligated to support all behavior from a bank that can lead to bankruptcy.

If a private insurance company accepted money and in return promised the client the right to withdraw their money at any time, contingent upon nothing, where the right to withdraw is absolute, then I would ALSO consider the private insurance company to be insolvent if such accounts exceeded its ability to pay.

"If this is what the bank and their clients are willing to do, then they should incur the full costs of this behavior,"

"So what is this now? An admission that such loans with a callable option are NOT illegitimate and fraudulent?"

That's red herring nonsense.

IF a bank and their clients want to engage in that behavior, then it doesn't matter if I label it as fraud or not, my point is that whatever you want to call it, the bank and their clients should incur the full costs of engaging in that behavior, and not pass it off onto innocent people through theft at gun point, i.e. FDIC. They should incur the losses, and have their entire life's savings WIPED OUT, if they are so adamant in defending the practise as being "free contract" that is "nobody else's business."

You are, quite expectedly, ignoring the coercion that is necessary for your "solution" to the problems of FR to be made manifest.

You yammer on and on about how people should be free to engage in FR, because it's nobody else's business, but you contradict yourself on that on multiple levels, for not only do you WELCOME violations of such free contracts, by calling for the government to use coercion to "curtail" credit expansion below some arbitrary, unnamed limit, but you also contradict yourself by calling for the government to use coercion to take money away from those who aren't clients of the bankrupt bank, to bail out the banks and clients who end up with nothing because their bank went banktrupt due to not being able to satisfy its demand deposit obligations on the basis that the bank engaged in FR.

Your rubbish is nothing but a giant contradiction based on an ignorance of economics, time, praxeology, and property rights.

I said: "If on the other hand there is a time period contracted for, such that in addition to the metaphysically required time needed to engage in ANY action, there is also a minimum stipulated time such that although the person is physically capable of taking possession and exercising ownership of one's money, which of course takes time, there is a mandatory "waiting time" as well. That is when present goods turn into future goods."

You said: "if this were true, then a ticket for parking lot, where you can come to the private carpark and look for a parking place any time you (within opening hours), would not be a future good either, and would be invalid or illegitimate or fraudulent."

Nonsense. Hoppe already dealt with Selgin and White's confusion regarding parking lot tickets and the concept of property rights, as well as present and future goods.

Parking lot tickets possess only temporally conditional value until the time of the drawing, and they become worthless as soon as the parking spots have been allocated to the ticket holders. They are not fraudulent.

"Now, a contract that is called a loan with perpetual call option, is, economically, a present good, because it is no different, economically, from holding one's money buried in a box in one's backyard."

"You have:"

"(1) lent the money out and transferred ownership;"

"(2) now faced the risk of default, and"

"(3) the act of calling it back is different from merely digging up something"

Red herring. I said that are not economically different.

(1) is the thing under argument, so you can't use it as a premise, because it's begging the question.

(2) is economically no different from holding money underneath your mattress, or burying it in your backyard. In both cases, you run the risk of losing that money, either by house fire, or earthquake.

(3) They are no different economically speaking. Taking money out of the ground is not economically different from taking money out of a brick building, when the context is control over present goods versus future goods.

I said: "You have not given up use of that money. There is no difference in principle here between giving your money to a banker for a demand deposit, and stuffing money into a box and burying it in your backyard."

You said: "Nonsense for reasons listed above."

False. Your "reasons listed above" nonsense was not even a reasoned argument, so my point still stands.

All you said was "they're different". That's not a listing of "reasons" WHY they are different. Try again.

They are no different economically speaking. Taking money out of the ground is not economically different from taking money out of a brick building, when the context is control over present goods versus future goods.

Yes, they are: because the drawing down of a FR account is nothing but repayment of a debt. You are not merely "from taking money out of a brick building" as if the money was a bailment.

This now just all collapses into whether the FR account is a mutuum loan.

I said: "The demand depositer has NOT in fact given up immediate command over the money. He has a claim that allows him immediate control over the deposited money."

You said: "By this logic, the owner of any liquid financial asset (say, a bond) has not given present for future goods either, because they can quickly obtain money by selling the bond on a secondary market."

Non sequitur. That does not follow.

I was the one who said that the mere fact that time passes is not what distinguishes present from future goods. You therefore cannot say that because time passes in the case of liquid assets, that all of a sudden I have to change my position and cease calling it a future good. I do not hold the same crap worldview as you, so you cannot presume I do when you make mention of mere time passing.

You're not getting the argument here. What does distinguish present from future goods is purposefully forsaking present consumption for future consumption, by contracting it away to someone else for a minimum time period.

This means that "forsaking present consumption" is NOT manifested when you make mention of the metaphysically unavoidable time that MUST pass in ALL human actions no matter what they are. Yes, metaphysically, time passes for ALL human actions, so you cannot say that humans are purposefully "forsaking" present consumption for future consumption. They have NO control at all over time in this sense. It would be like saying that at age 100, a man "forsaked" his life for some after life. No, he just died from old age, it wasn't under his control.

Same thing with separating present goods from future goods. It's not the fact that time passes, it's that the person PURPOSEFULLY abstained from control over for a certain time period, by granting ownership to another party.

So, in the case of a bondholder, the lender DID in fact purposefully abstain from consumption, i.e. control over money. He does not have an unconditional and absolute control over the money. Within the matrix of time necessarily passing for all actions, he went over and above that and added a human element, of purposefully giving up control over a good for a certain time period. THAT is when a present good becomes a future good to him. It's NOT due to the mere fact that time has to pass for him to accomplish any action at all.

"The bondholder has NOT in fact given up immediate command over the money. He has a asset/claim that allows him immediate control over the money he lent by selling it."

False. He does not have immediate control over the money. The owner of the money has immediate control over the money. If a bondholder has immediate control over the possible future sale of the bond, then that means you are saying two parties BOTH have immediate control over the same sum of money.

For a liquid bond that has a market value of $100, the potential buyer of the bond has immediate control over $100 right now, before the sale, and the bondholder would also have immediate control over that $100 right now, before the sale.

But two parties cannot both have immediate control over the same property. Only one party can have immediate control.

Again, you're totally misunderstanding the nature of property rights. Property rights cannot be split. They are binary. You either have it or you don't. Two parties cannot have ownership rights over the same exact property. And no, before you herp derp over joint ownership, then you must realize that each person owns half of the thing in question, according to either space, or time, or both. They can't both own the other person's "share".

A bond with a perpetual call option is not economically different from a demand deposit where ownership is explicitly stated to be retained with the client.

"IF a bank and their clients want to engage in that behavior, then it doesn't matter if I label it as fraud or not, my point is that whatever you want to call it, the bank and their clients should incur the full costs of engaging in that behavior, and not pass it off onto innocent people through theft at gun point, i.e. FDIC."

Oh, I see:

(1) with your weasel words above, you're now just saying that the loan with callable option isn't fraud after all: it is legitimate free contract.

(2) since the FR account is nothing but a type of loan with callable option, it follows by simple logic that it too must be legitimate if you accept (1).

(3) You know slyly change the subject with the "bailouts-are-theft!!!" argument.

With (1) and (2) above you have now effectively conceded that FR banking is legitimate, not fraud.

"we should call holding one's money in one's backyard, or backpocket, to be a future good, because we cannot "change the fact that until I have physical possession of the money, I have given up present goods."

"(1) keeping your money in a chest or buried in the ground on your property is merely holding of an asset. You still own the asset. You get nothing in return, and there is no exchange involved. It's the same money you dig up."

Keeping your money in a brick building called a bank is merely the holding of an asset. You still own the asset. You get nothing in return for it, because you did not exchange property ownership. The claim the brick building's owner gives to you, is not giving you something in return for your money, it's giving you something that tells you he has your money, much like your drawing of a map tells you where your money is buried.

"(2) A mutuum loan to the bank IS an exchange of present for future goods, in which you give up the present good - the money - and the ownership of the money, hand the money over, in exchange for the future goods that are interest and/or banking services (e.g., use of cheques, a debit card, electronic funds transfer overseas etc), and the future good that is the tantundem (different money of the same quantity), the calling of your loan money back in whole or part if you wish too."

If you retain absolute and unconditional control over a sum of money, meaning, there is no minimum time period you agreed that must elapse before you can take possession of the money, in the context of exchange, then the money you give to a bank is not a loan, but a demand deposit.

"Economically speaking, that's nonsense. If you retain perpetual control over the money, if "lend" money to a back that has a perpetual call option attached, where the bank is obligated to give you the money at any time you wished, then there is no difference, economically speaking, between that and what you would call a bailment deposit."

"(1) It not a bailment at all: it is mutuum with the option of calling back some of your loan money."

I said it is not economically different. In terms of actions, there is no difference. In both cases, the depositer retains absolute and unconditional control over the money in the present, meaning, there is no additional time that is contained in the contract other than the impossible to contract away necessary positive amount of time that must elapse for any action to be carried out.

"(2) You sneak in the words "perpetual control over the money" - which can only mean in this context "ownership of the money," a total lie and misundertanding again of the FR account."

It's not a "sneak". A demand deposit has no minimum time period in the contract. When you deposit money into a bank as a demand deposit, you are not engaging in a transaction where you must wait a minimum amount of time before the unconditional controller of the money is you again, as it is with a bond or loan. By you trying to defend demand deposits being loaned out, on the basis that they are really "loans with a call option exercisable at any time", you are admitting this is the case.

"(3) "bank is obligated to give you the money at any time you wished"

"Again the dishonest words: "give you the money at any time you wished" - no, it doesn't: it has entered a contract TO REPAY its loan to you on demand."

That is just another way of saying the exact same thing I just said. "To repay on demand" is the same as "obligated to give you the money any time you wished."

"Keeping your money in a brick building called a bank is merely the holding of an asset. "

Your original money is NOT merely "money held in a brick building with security guards". The original money was a mutuum (a loan): the bank became the owner, and lent most of it out.

The money "held in a brick building with security guards" would be part of the bank's reserves called vault cash, from which it draws tantundem payments to repay loans to FR clients. The reserves ARE NOT YOUR MONEY. Your FR account is just the record of a debt on the bank's balance sheet, and you can call back the debt and get repayment from reserves, should you wish.

"You get nothing in return for it, because you did not exchange property ownership."

False: you DO give up ownership, and you DO get something in return:

(1) often interest (certainly in historical FR accounts) (2) banking services: cheques, debt cards (to purchase say things on the internet), money tranfer overseas, often foreign exchange transactions services without charge or little charge compared to other places.(3) a debt instrument, which you can call on at a later date

"By the same flawed logic you use, almost ALL insurance companies are fraudulent because they might be "immediately exposed as 'insolvent' as soon as they have to satisfy all of their insurance claims relatively close together."

My suspicion that you would herp derp over insurance companies is proven correct, and I have already dealt with it above. You're wrong.

"If you were right, then bank runs could not result in a bank's bankruptcy. They would have enough assets to satisfy all their liabilities. "

"I've already dealt with your laughbale, idiotic ignorance here: a surge in FR account clients deamnd for repayment demonstrates the degree of liquidity of the bank's assets and whether it jusged worthy by other bank/lenders to borrow agianst its assets."

You have tried to deal with that, and utterly failed.

For even if the bank succeeded in selling all of its capital assets at their market values, they would still not have enough to satisfy a bank run where all demand deposits are attempted to be withdrawn.

"Many FR banks have been perfectly capable of meeting their obligations, even in a crisis, because they have asset holdings that include highly liquid assets that allow them to get money quickly. Or they can borrow against some of their assets."

"When you deposit money into a bank as a demand deposit, you are not engaging in a transaction where you must wait a minimum amount of time before the unconditional controller of the money is you again, as it is with a bond or loan."

What? So now loans with a callable option are suddenly illegitimate again?

Buy this statement you implied that you actually can accept the callable option loans as legitimate:

"IF a bank and their clients want to engage in that behavior, then it doesn't matter if I label it as fraud or not, my point is that whatever you want to call it, the bank and their clients should incur the full costs of engaging in that behavior, and not pass it off onto innocent people through theft at gun point, i.e. FDIC. They should incur the losses, and have their entire life's savings WIPED OUT, if they are so adamant in defending the practise as being "free contract" that is "nobody else's business."

Answer this question clearly and explicitly, without equivocation:

(1) Do you or do you not regard loans with a callable option, where property rights in the loan money are transferred to the bank, as fraudulent and illegitimate?

"Anti-FR advocates argue that a person keeping their money underneath their mattress where they retain unconditional and absolute control over the money, or in a bank where they retain unconditional and absolute control over the money,"

"The FR client does not "retain unconditional and absolute control over the money" - he has given up ownership and control and the bank now owns the money and lends most of it out."

False. The client retains control because he can take physical possession of it at any time he wants, on demand. Control does not rest with the person closest to the property. Control rests with he who has the unconditional right to take physical possession of it any any time he wants, whose demand overrules anyone else's.

Money that is kept in a building doesn't mean the money belongs to the owners of the building, nor does it mean that money belongs to the person closest to the money.

Why should someone's rights of control over money change if instead of putting it under their mattress for safe keeping, they put it in a brick building instead?

"The fractional reserve account is a mere debt, a debt instrument. The FR client receives back, not the same money, but DIFFERENT money, a tantundem, from the bank's reserves, sale of financial assets or borrowing against assets."

You cannot call a contract a debt contract if it is economically indistinguishable from a demand deposit contract. Two parties cannot both have present control over the money. You say the bank has present control, but not the client. But then you cannot say that the client has the right to withdraw the money ON DEMAND, because that would imply present control over the money!

"Why do I retain present control over money held underneath my mattress, but not money held in a brick building with security guards?"

"LOL, that is because your original money is NOT "money held in a brick building with security guards". The original money was a mutuum (a loan): the bank became the owner, and lent most of it out."

But then I could not have present control over a sum of money as is necessary for a contract that says I can withdraw that sum of money ON DEMAND. The failure of the bank to satisfy this ON DEMAND obligation is the fact that it will go bankrupt if all demand depositers asked for their money.

You fallaciously claimed that this is due to the fact that assets are illiquid, but I have already refuted that by correcting that error and telling you that EVEN IF the bank could liquidate all of its capital assets, it still wouldn't have enough to satisfy their demand deposit liabilities.

"The money "held in a brick building with security guards" would be part of the bank's reserves called vault cash, from which it draws tantundem payments to repay loans to FR clients. The reserves ARE NOT YOUR MONEY. Your FR account is just the record of a debt on the bank's balance sheet, and you can call back the debt and get repayment from reserves, should you wish."

If it's not my money, then the bank cannot tell me, and it cannot tell others, that I have present control over the money, which is necessary if our contract is to be called a contract that gives me the right to take possession of money on demand, which means at any time I wanted.

Economically, what is happening is that more than one party is claiming present control over the same present good (money).

Merely repeating the mantra semantics that ownership has been transferred, that it is debt, etc, doesn't change the economics of it.

When the context is economics, you have failed to distinguish between the two.

"The client retains control because he can take physical possession of it at any time he wants, on demand. Control does not rest with the person closest to the property. Control rests with he who has the unconditional right to take physical possession of it any any time he wants, whose demand overrules anyone else's. "

There is NO "unconditional right to take physical possession of [sc. the money] ... any any time he wants": you're just confusing a bailment with a mutuum, and begging the question.

There is contract saying that a FR client has the right to demand repayment of a loan. Different thing.

"Why should someone's rights of control over money change if instead of putting it under their mattress for safe keeping, they put it in a brick building instead?"

I repeat: your original money is NOT "money held in a brick building with security guards" or money "put ... in a brick building". The original money was a mutuum (a loan): the bank became the owner, and lent most of it out.

The money "held in a brick building with security guards" would be part of the bank's reserves called vault cash, from which it draws tantundem payments to repay loans to FR clients. The reserves ARE NOT YOUR MONEY. Your FR account is just the record of a debt on the bank's balance sheet, and you can call back the debt and get repayment from reserves, should you wish.

"You say the bank has present control, but not the client. But then you cannot say that the client has the right to withdraw the money ON DEMAND, because that would imply present control over the money! "

The client demands repayment of a loan, not return of a bailment.

And I'll ask you again, answer this question clearly and explicitly, without equivocation:

(1) Do you or do you not regard loans with a callable option, where property rights in the loan money are transferred to the bank, as fraudulent and illegitimate?

I said: "IF a bank and their clients want to engage in that behavior, then it doesn't matter if I label it as fraud or not, my point is that whatever you want to call it, the bank and their clients should incur the full costs of engaging in that behavior, and not pass it off onto innocent people through theft at gun point, i.e. FDIC."

You said: "you're now just saying that the loan with callable option isn't fraud after all: it is legitimate free contract."

Red herring.

I didn't say it's fraud and I didn't say it's not fraud. That's the conclusion I am trying to reach by going through the economics of it. You seem to be all flustered and eager to paint me as either a supporter or an antagonizer.

I am talking about the economics of it, not who defines what as fraud and what words you want to use to define certain economic actions.

You don't seem to want to address my argument about the coerciveness of FDIC insurance, and how you cannot square your alleged "free market" defense of FR banking contracts, with your call for others to be taxed in order to bail out the bankers and clients of a bankrupt bank due to FR practises.

Why don't you actually ADDRESS this? You claim others are wrong for wanting to "interfere" in free trade concerning fractional reserve banking, because if clients and banks want to engage in it, then they should be free do so and not be threatened with force, but then you talk out of the other side of your arse and say that people SHOULD be threatened with force, so that they pay the government their money which then finances FDIC and bails out the bankers and clients who incurred FR related losses.

Call me what you want, but you can't call me a hypocrite, because you are a HUGE hypocrite.

You don't want violence against free trade, except when you want it, which just so happens to be when you want to bail out those who incurred losses for engaging in FR.

"(2) since the FR account is nothing but a type of loan with callable option, it follows by simple logic that it too must be legitimate if you accept (1)."

You keep DEFINING FR accounts as "loans with a type of call option", but you have not yet explained how this is economically different from having control over a present good, as in holding money underneath one's mattress.

All your attempts have failed. Time? Failed. Risk of loss? Failed.

All you keep doing is saying "It's a debt, it's a loan, it's a debt, it's a loan!" without explaining why those are loans, whereas economically identical contracts are not loans.

"(3) You know slyly change the subject with the "bailouts-are-theft!!!" argument."

But you brought FDIC up, not me. You were the one who said (one of) the solution(s) to credit expansion problems is FDIC insurance. But you cannot then say anything against those who want to ban FR if you believe it would be coercive and interfering with free trade to do so. This is because FDIC is itself coercive, because it is based on force transferring money from those who didn't incur FR losses, to those who did incur FR losses.

This is not "changing the subject." It's explicating what you brought up. You're only trying to sweep it under the rug because you know you contradicted yourself, by saying I'm trying to change the subject. LOL

"With (1) and (2) above you have now effectively conceded that FR banking is legitimate, not fraud."

I have conceded no such thing. I have not said it is fraud and I have not said it is not fraud. Not saying or implying it is or is not fraud is not the same thing as saying it is fraud. If I don't say it's not fraud, that doesn't mean I have made a conclusion yet.

Regardless of what you want to call it, you are not addressing the economics of it.

"Keeping your money in a brick building called a bank is merely the holding of an asset."

"Your original money is NOT merely "money held in a brick building with security guards". The original money was a mutuum (a loan): the bank became the owner, and lent most of it out."

Again, you're just defining it that way without explaining it. By that crap treatment, I could just define someone's money underneath their mattress as a loan to the owner of the house, and then not explain why.

"The money "held in a brick building with security guards" would be part of the bank's reserves called vault cash, from which it draws tantundem payments to repay loans to FR clients."

You have not explained how this is different from holding cash buried in someone's backyard.

"The reserves ARE NOT YOUR MONEY. Your FR account is just the record of a debt on the bank's balance sheet, and you can call back the debt and get repayment from reserves, should you wish."

Sigh, "The money underneath your mattress IS NOT YOUR MONEY. Your memory is just the record of a debt on the homeowner's balance sheet, and you can call back the debt and get repayment, should you wish."

"You get nothing in return for it, because you did not exchange property ownership."

"False: you DO give up ownership"

False. You have not explained how retaining present unconditional control over a sum of money (demand deposit) makes that an ownership transfer from client to bank.

You keep DEFINING FR accounts as "loans with a type of call option", but you have not yet explained how this is economically different from having control over a present good, as in holding money underneath one's mattress.

"I have not said it is fraud and I have not said it is not fraud. Not saying or implying it is or is not fraud is not the same thing as saying it is fraud. If I don't say it's not fraud, that doesn't mean I have made a conclusion yet."

> "Your original money is NOT merely> "money held in a brick building with> security guards". The original money was a> mutuum (a loan): the bank became the owner,> and lent most of it out."

"Again, you're just defining it that way without explaining it.

Tell me: are you incapable of understanding the following concepts:

(1) a mutuum loan of money(2) the process of lending money out(3) the debt the debtor now owes to the creditor?

If you are in fact capable of understanding the concepts, then everything I have said in the statement "Your original money is NOT merely money held in a brick building with ... etc." follows easily and logically.

I said: "IF a bank and their clients want to engage in that behavior, then it doesn't matter if I label it as fraud or not, my point is that whatever you want to call it, the bank and their clients should incur the full costs of engaging in that behavior, and not pass it off onto innocent people through theft at gun point, i.e. FDIC. They should incur the losses, and have their entire life's savings WIPED OUT, if they are so adamant in defending the practise as being "free contract" that is "nobody else's business."

You said: Answer this question clearly and explicitly, without equivocation:

"(1) Do you or do you not regard loans with a callable option, where property rights in the loan money are transferred to the bank, as fraudulent and illegitimate?"

That is contingent upon my first coming to a conclusion on whether or not there is an economic difference between that and a demand deposit where ownership is retained by the client. You seem to not be paying attention. I said I am on the fence on whether to call it fraud or not. I am trying to arrive at that conclusion by FIRST fully understanding the economics of it.

So far, you have given a very unpersuasive and at times contradictory set of arguments to answer my challenges. You cannot possibly consider yourself intellectually equipped to be able to settle this for me, if I am able to expose so many errors and holes in your claims.

I WANT to answer the question of whether I consider a loan with a perpetual call option as fraud or not fraud. But I CANNOT do that unless there is a clear economics argument I am aware of that would distinguish such contracts from contracts where ownership titles are not transferred but retained by the client.

Economically speaking, that is, reasoning grounded on praxeology, at this point in time, you have not presented any good argument on why I should label and define FR accounts the way you label and define them, i.e. loan, future good, ownership title transferred, etc.

By all rights, by the nature of property ownership, if someone is told that they can take possession of an object at any time they wished, that is, on demand, and if there is anyone else who also makes the same request for that same object, but their claim is subordinate to the claim of the first person, then, economically speaking, at this time I see no other label than "ownership." For what is ownership? It's having the right to take possession of something at any time one wished, where everyone else's claim is subordinate!

If you say no, my claim IS subordinate to the banker's claim, when it comes to my deposit money account, then I cannot be said to have a deposit that is payable on demand. It would be a deposit that is payable on the contingent granting of the bank.

Call that what you want, but it is not economically equivalent to a demand deposit, and it is not even economically equivalent to money, and yet these transferable claims to money are forced by the government to be accepted as a medium of exchange anyway.

Maybe if the government didn't impose any legal tender laws at all, and did not bail out those who engaged in the practise, would I have a clearer picture on whether FR was fraud or not.

That contradicts your claim that the client has the right to withdraw the money on demand.

"You say the bank has present control, but not the client. But then you cannot say that the client has the right to withdraw the money ON DEMAND, because that would imply present control over the money! "

"The client demands repayment of a loan, not return of a bailment."

Again you're just playing semantics. Whatever you want to call it, I am saying that economically speaking, the client has a right of present control over a sum of money. On demand means having present control. If you say he doesn't have present control, then you can't say it's on demand, i.e. whenever the client wants it.

"And I'll ask you again, answer this question clearly and explicitly, without equivocation:"

"(1) Do you or do you not regard loans with a callable option, where property rights in the loan money are transferred to the bank, as fraudulent and illegitimate?"

I've already answered that question above.

"But then I could not have present control over a sum of money as is necessary for a contract that says I can withdraw that sum of money ON DEMAND."

"Correct."

That contradicts your claim that the account WAS on demand, at any time the client wished.

"You do not have present control over a sum of money as a bailment: you have a contract allowing repayment of a debt obligation on demand. Different thing."

Again, economically it's no different at all. You're just defining them differently, when they are economically equivalent.

"There is now no further point to any discussion here on this thread, unless you answer the question:"

"(1) Do you or do you not regard loans with a callable option, where property rights in the loan money are transferred to the bank, as fraudulent and illegitimate?"

I have already answered this question, and the answer is that it depends on whether I can ascertain whether or not there is an economic difference between the two. You have insisted that there is a difference, but you have not shown what those differences are without contradicting yourself.

"If "yes," then callable option loans, must be illegal by a private law code in an anarcho-capitalist world."

"If "no," then fractional reserve accounts must be legitimate, along with callable option loans, because they are the same type of thing."

You forgot "I'm still thinking about it, contingent upon the conclusion of the economics analysis."

So far, you have not given me any reason to distinguish the two, but I'm still open to hearing arguments.

"I have not said it is fraud and I have not said it is not fraud. Not saying or implying it is or is not fraud is not the same thing as saying it is fraud. If I don't say it's not fraud, that doesn't mean I have made a conclusion yet."

"Maybe if the government didn't impose any legal tender laws at all, and did not bail out those who engaged in the practise, would I have a clearer picture on whether FR was fraud or not."

"So now you can't even say whether in an anarcho-capitalist world FR banking is fraud?"

I am not a social planner. In an anarcho-capitalist world, some individuals might get together and outlaw the practise amongst themselves, whereas other individuals might get together and not outlaw the practise amongst themselves. I just don't know.

"Despite endless assertions that it IS actually fraud above and on earlier posts. What a waste of time."

Huh? Nowhere have I said that it is fraud. Stop lying. The closest I came to making any judgment was saying that it is ECONOMIC "fraud", which means I don't consider it fraud in the sense of criminality, but "fraud" in the sense of going against what I think are economically imposed constraints. That's why I put "fraud" in quotes.

Sorry if you think that my not agreeing with you is a "waste of time."

"he closest I came to making any judgment was saying that it is ECONOMIC "fraud", which means I don't consider it fraud in the sense of criminality, but "fraud" in the sense of going against what I think are economically imposed constraints."

"Whatever you want to call it, I am saying that economically speaking, the client has a right of present control over a sum of money."

"No, he doesn't: he has the right of calling back a loan."

That is the same thing, said in different words, for the sole reason that by wording it in that way, you can claim that your conclusion it is a loan, is true.

You can't say "no he doesn't have present control over a sum of money, what he really has is present control over a sum of money that I label as loan."

Economically speaking, there is no difference between a client having control over a demand deposit that the bank is obligated to satisfy at any time the client wants, and a client having control over an FR account that the bank is obligated to satisfy at any time the client wants. In both cases, the client isn't giving up present control over a sum of money. In both cases, he can take physical possession of his money at any time he wants.

I said: "On demand means having present control. If you say he doesn't have present control, then you can't say it's on demand, i.e. whenever the client wants it."

You said: "You don't have "present control" because it is a debt instrument, not a bailment."

You're again just begging the question. All you have to say is that "It's a loan! It's a loan!"

Forget about labels. Look at the economics of it. In both cases, the client can take physical possession of the money any time he wants. That IS what "present control" means! You can't say it's not present control because you label the FR account as a loan. It's still present control because at any time, the client can take physical possession of the money, just like he can take physical possession of a sum of money in a demand deposit account whereby the client retains ownership, just like he can take physical possession of a sum of money buried in his backyard, or underneath his mattress.

By pathologically focusing on labels and names, you are missing the economics of it.

Economically speaking, an FR account holder, because he has the right to take physical possession of the money any time he wants, it means that economically speaking, that client has control over a present good, not a future good. Even if you call it a "loan!", even if you call it "not a bailment!", even if you call it "it's a mutuum!", even if you call it "ownership rests with the bank!", when it comes to the economics of it, the client never gives up present control since he can take physical possession of it any time he wants.

"A FR account repayable "on demand" means a debt repayable according to the terms of the contract. Obviously, before the days of ATMs this did not mean "anytime, anywhere."

You're again just begging the question. You're just labeling an FR account a debt, without showing why.

I said: "he closest I came to making any judgment was saying that it is ECONOMIC "fraud", which means I don't consider it fraud in the sense of criminality, but "fraud" in the sense of going against what I think are economically imposed constraints."

You said: "So now we have a new concept: ECONOMIC "fraud"!"

You speak as if innovation is not permitted in economics.

Yes, economic "fraud." I would also put labor theory of value in that heading.

"But not fraud in the sense of criminality!"

It CAN be fraud in the sense of criminality. It CAN be fraud in this sense because a bank COULD agree to keep a client's money safe and available at all times, but go against that agreement and loan the money out. That COULD happen. Throughout history, many banks did go behind their client's backs, so to speak, and many banks did commit legal fraud in this sense.

In principle though, like in a world that most likely will never exist, it is possible for every client to be aware of what their banks do with the deposit money. But I have not yet seen that world exist. In fact, in the UK for example, a recent study showed that almost 70% of all demand deposit clients, believe that their banks have the money with them, on hand, and not loaned out to someone else. This by itself does not prove fraud, because it is possible that the contracts they all signed contained statements to the effect that the banks are going to lend the money out, but the banks are definitely not up front about it, and I suspect that there is a good reason for it. My suspicion is that banks keep this hushed because if everyone really did know what went on, they'd withdraw their money and the bank would collapse.

Ultimately however, banks cannot keep making new loans unless the central bank tops up the bank's "deposits", i.e. money on hand. If the central bank stops creating new reserves, then at some point, banks would not be able to create new loans because it would cause them to be unable to finance their expenditures an their client's withdrawal requests.

That means loans create more debt instruments. These are acceptable as a means of payment/medium of exchange and endogenously expand the broad money supply. The process is a fundamental characteristic of modern captalism, and in the past also involved bills of exchange and other private promissory notes.

"banks would not be able to create new loans because it would cause them to be unable to finance their expenditures an their client's withdrawal requests."

Yes they can. Imagine only one private bank. Run the transactions through that and you'll find it never needs to go to the state for anything. Deposits simply move between accounts at the same bank.

Then when you expand that to two banks with a central bank intermediator you find that the net imbalance between the two banks is sorted by the debtor bank simply charging the creditor bank interest for the loan of central bank assets.

And the central bank must accommodate the imbalance or it will quickly lose control of its policy rate.

The central bank has no control over quantity if it wants control over the price.

"What I find amusing about this is that in a private banking world a bank has no real need of deposits.

Loans create deposits....

"Imagine only one private bank. Run the transactions through that and you'll find it never needs to go to the state for anything. Deposits simply move between accounts at the same bank."

Make up your mind. "Private banking" generally implies competitive banking. Among competitive banks, lending without prior deposits/reserves leads to quick failure. That is why ordinary banks seek deposits, instead of merely creating them. The idea that ordinary banks can "create" all the deposits they like is among the hoariest fallacies of "pop" econ. And no, you don;t have to be a nutty free banker to think so. James Tobin, for one, agreed. See this excellent JP Koning post: http://jpkoning.blogspot.com/2013/08/do-banks-have-widows-cruse.html